OVERVIEW OF SOLAR POWER IN IRAN

March 2017
ASSET MANAGEMENT AND PRIVATE EQUITY
 OVERVIEW OF THE SOLAR SECTOR IN IRAN AND CURRENT FRAMEWORK

Overview of the renewable energy sector in Iran Geographically well suited for solar

On the whole, the Middle East energy sector is dominated by low priced Iran has been described as a region with great potential for
fossil fuels that present both economic and environmental issues solar energy utilization
Iran is currently only producing 0.2% of its energy from renewable The average solar radiation in Iran is 4.5 5.5 kw h/m2 with
sources. The sector is currently made up of mainly wind with c54 MW, c300 sunny days per year on two thirds of its land area
Solar with c15 MW, biomass with c14 MW and hydropower at less than 1 The higher irradiation rates belongs to central-south areas of
MW Iran with the average irradiation of 5.2 to 5.4 kWh/m2/day in
Coupled with the above, Iran has an extremely high level of energy Kerman, Yazd, Fars, Kohkiluyeh va Buyer Ahmad, Hormozgan
consumption per capita which led to the Country reaching the peak of its and Chaharmahal va Bakhtiari provinces
production capacity in the summer of 2016 However, most of these regions are dry and dusty land with
The Iranian government is actively pursuing a policy of moving away from higher operation cost of PV systems due to lack of self-
hydrocarbons as a source of production to more renewable sources in cleaning mechanisms in the majority of solar panel systems
order to create diversity within its energy mix as well allowing to focus
more of its natural resources on exports vs domestic consumption
In 2016, the Government set a new plan that looked to install 5,000 MW
of renewed capacity by 2020 vs the current capacity of c85 MWs
This will help address the future energy shortage as Irans consumption
will grow at c6% a year but growth in its generating capacity is only
limited to a third of this
Renewables Framework in Iran
Through the Iranian Power Generation, Transmission, Distribution and
Management Company (TAVANIR), the Iranian government operates
their Renewable Energy Organisation (SUNA)
SUNA was established in 1996 with the original goal to have responsibility
for evaluating Irans potential renewable energy sector and trying to
attract private sector investors with a guarantee to purchase any
renewable power produced
But today SUNAs responsibilities have increased to include acting as the
regulatory authority for developing policies, issuing licenses for renewable
projects and entering into power purchase agreements ('PPAs') with
developers.

Source: CBI, SAMA, World Bank, 2014

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UNDERSTANDING THE PRICING FORMULA & PROCESSES TO SOLAR FARMS IN THE COUNTRY

Pricing Formula & Tariff Rate

1 2 3 4 5
Inflation / FX Second 10
Conversion Domestic
Tariff
= Base Rate
x Rate x Adjustment
Factor
x Manu. x year
adjustment

1 The base rate is the tariff rate agreed at the time of signing of the 3 The adjustment rate is a yearly mechanism that can be weighted
PPA. It varies depending on the size of the project. Please see the more towards the change in the central banks EUR fx rate, or the
table for the split in tariffs across each farm size change in the CPI rates for inflation. This will affect the total tariff
Solar Farm Size Base Tariff in Rials Base Tariff in Dollars
on a yearly basis
Above 30 MW 3,200 0.10
30 MW and Less 4,000 0.13 4 The government provides an additional 30% to the rate of the tariff
10 MW and Less 4,900 0.16 if the developer purchases all of the required machinery from
100 KW and Less 7,000 0.22 Iranian producers. This scales, for instance if one purchases 50%
20 KW and Less 8,000 0.26 than they will receive a 15% increase in tariff
2 The conversion rate is the rate that the farm is producing energy per
its capacity. For instance if a 10 MW farm producers 2MW/h it is 5 For the second 10 years on the PPA, there will be a 30% reduction in
producing at 20%. One of the worlds most productive solar regions, the rate of the tariff
Arizona operates at c29% whilst England/Northern Europe are closer
to 11-12% Process

Application & Obtaining Concluding

issue of further permits Power Purchase Construction Operation
construction Agreement with Commissioning
(environmental, Phase Phase
permits grid etc) SUNA

1. In order to start construction a renewable power plant in Iran, an application 5. The plant must be commissioned within 18 months of the conclusion of the
must first be sent to SUNA containing the key details of a project PPA otherwise the tariff at the time of commissioning will be applied rather
2. It must be an Iranian entity, therefore foreign investors are required to form than the previous agreed tariff rate at time of signing
a company in Iran. However it is okay for a foreign investor to hold 100% of
an Iranian company
3. Upon issuance of the construction permit, other permits such as grid
connection, land permits and environmental preservation need to be
obtained
4. Once these are received, the investor can commence construction. They will
however, be required to periodically submit progress reports to SUNA

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POWER PURCHASE AGREEMENT OVERVIEW

20 years after which the developer can sell to the electricity to private parties subject to the Ministry of
Term
Energies (MoE) approval

Land Cost The developers responsibility

Design & Finance Cost The developers responsibility

Payment Currency Iranian Rials

SUNA to open a letter of credit in Rials in favour of the developer in an Iranian bank for an amount equal to 6
months of payments under the agreement. The subsequent renewals of this letter will be the developers
Payment Guarantees
responsibility. We have heard that by early 1396 that SUNA will be providing payment guarantees backed by
the state

Delay Payments SUNA to compensate the developer based on a minimum interest rate offered in Iran

Construction Cost The developer is responsibility for all construction and maintenance costs

The tariff rates announced at the time of signing of the PPA or the applicable tariff rates at the commercial
Feed in Tariff Rates
operation date

The developer will be subject to Iranian corporate taxes but will receive tax credits for investing in less
Taxation
developed regions of Iran

Grid Connection Cost The developers responsibility to bear the cost of connection to the national grid

Governing Law Iranian Law

If negotiations fail between the two parties, than both parties agree to form a committee with an
Dispute Resolution Mechanism
independent third party that will help settle the dispute

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POTENTIAL CHALLENGES THAT LIE AHEAD FOR THE SOLAR SECTOR IN IRAN

Domestically, the local Iranian banks are not prepared to offer project finance and will only provide
Fundraising remains a loans at very high interest rates (around 20%).
challenge Internationally, the global financial sector is still hesitant to fund projects in Iran due to the US
sanctions that remain in place
Developers might be concerned whether SUNA has the financial capability to meet its financial
obligations for payment of the minimum tariff rates announced. SUNA has announced that it will
Creditworthiness of SUNA provide a letter of credit for six months. Additionally there is word that the H2 2017 PPA will have a
sovereign guarantee clause

Local developers lack experience and knowledge compared with other jurisdictions where renewable
Local capability energy is more developed. Furthermore, in a country where the majority of energy is generated by
fossil fuels, there is a lack of knowledge about the benefits of renewable energy, particularly in rural
areas.

Although a German company established a 14MW farm in Iran, The current regulations in place have
Regulatory framework not yet been fully tested. There have not yet been sufficient renewable energy projects in Iran to gain
a full understanding of how the regulations will be applied

For renewable energy projects the location is a key consideration. However, acquiring public
Land acquisition
or private land in Iran can be a time-consuming and expensive task for developers

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LOCAL SUPPLIES AND INFORMATION
Local supplier companies

Panel Price Panel

Company Location Products Comments
(for a 1MW project) Efficiency
In 2012 Pak Atiyeh acquired production line
PV panel, micro-
Pak Atiyeh Razavi Mono (64 cent/watt) of Aria Solar Sanat Co.
inverter and 20%
(manufacturer) (a) Khorasan Poly (60 cent/watt) Micro-invertors are not suitable for power
structure
plants
SEI mutually manufactures 40w inverters
Sazan Electronic
PV panel, inverter with Tress, a Chinese company
Industries Semnan 88 cent/watt N/A
and structure SEI will charge $1.4m for EPC project of a
(manufacturer)
1MW solar plant with local equipment
Moj Gostaran
PV panel, inverter
Alborz Mazandaran 64 cent/watt N/A Imports South Korean products
and structure
(importer)(b)
(a) In 2012 Aria Solar Sanat Co. sold its production line machineries to Pak Atiyeh Co.. After significant devaluation of Rial, Aria Solar wasnt able to continue its operations and wasnt profitable
since most of its raw materials was imported
(b) Similar to Moj Gostaran, most of other local companies in this field are mainly importers

Considerations on solar energy in Iran An acquisition opportunity in Irans Solar Industry

Mono panels are suitable for cold and cloudy places whereas poly Sazan Electronic Industries Co. has a 10MW solar plant project which
panels are suitable for warm climate needs a partner to inject cash to complete and start operation with
following characteristics:
30% increase in tariff due to using local equipment can be breakdown Capacity of 10MW
to 15% for panels, 6% for inverters and 9% for structure, cables and 30 ha land located in North East of Semnan Industrial Zone
rest of the equipment
All civil operation of the land is completed
Iranian panels are better than Chinese panels in Iran (e.g. Yingli) Base tariff in PPA is 490 Toman per KWH. 22% out of 30% tariff
however theyre not as good as European or South Korean ones increase is achievable due to utilizing local equipment
Project completion needs 14 months
$11m investments for 70% stake
Payment term is 40% at the beginning, 30% after 4 months and
remaining 30% after another 4 months
Exchange rate of 37,500 USD/IRR is used

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